Germany mulls economic step

January 4, 2009

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By , BERLIN, Jan 4 – On Monday German Chancellor Angela Merkel will receive a festive children\’s choir raising money for charity. They are not the only ones wanting cash in Berlin – and others are singing a lot less sweetly.

The concert comes on the same day as what is promising to be a heated government meeting to discuss spending measures aimed at averting the worst recession to hit Germany since World War II amid a global economic downturn.

Europe\’s largest economy had in recent years shed its "sick man of Europe" mantle and remains the world\’s biggest exporter despite China\’s rapid catch-up.

But with global economic conditions cooling sharply, demand for German goods like fancy cars, machine tools and chemicals has fallen off a cliff.

The credit crunch is far from over in Germany, with hard-up banks still highly wary about lending firms cash, and the rising euro is making German exports more expensive.

In November, Merkel\’s government followed other countries in throwing billions at the economy to jolt it into life with state-backed loans to firms and infrastructure projects like new roads or renovating schools.

The medicine she administered has been widely criticised as too weedy, and pressure has grown – from economists, politicians from all sides, firms and even other countries – to give Germany a bigger shot in the arm.

Merkel says the first package was worth over $40 billion but critics accuse the government of exaggerating its efforts and say it represents only 12 billion euros\’ worth of new spending.

She appears to have got the message. On Monday, the ruling coalition – Merkel\’s CDU/CSU conservatives and the centre-left Social Democrats – are to chew over what else might be done.

The current political landscape in Germany provides the perfect recipe for squabbling, however, and critics say there is a risk that what comes out of Monday\’s meeting – and another one on January 12 – will be a damp squib.

The governing coalition is now wearily entering the fourth year of a rocky marriage, and both parties are looking ahead to elections in September when they hope to divorce the other and govern with another party at their side.

Agreeing on anything since 2005 has meant both sides giving ground, and the looming elections — Germans also vote in European and state-level polls in 2009 – make a compromise on a second stimulus package even harder.

Merkel is also coming under fire from the CSU, the Bavarian sister party to her CDU, which wants tax cuts in order to put more cash in shoppers\’ wallets. It has threatened to block any package it doesn\’t like the look of.

"My proposal of cutting income taxes combines what is necessary in the short term with what make sense in the long term," Economy Minister Michael Glos, who is from the CSU, told the Frankfurter Allgemeine daily on Friday.

This was echoed in a joint call ahead of Monday\’s meeting from the country\’s main industry lobby groups, urging the government to cut taxes for firms, as well as non-tax wage deductions like pension contributions.

So far tax cuts has been beyond the pale for the government, with Finance Minister Peer Steinbrueck — from the SPD — swatting such demands away and attacking Britain\’s "crass Keynesianism" for going down this path.

Merkel though hinted in her New Year\’s address this week that the taxman may start taking less of a cut from people\’s pay packets — provided this did not add to Germany\’s national debt for future generations to pay off.

Such a move is far from certain, however. Economic experts say the recent fall in energy prices is already cutting consumers some slack and the way forward should be more infrastructure projects.

"In the government, we are taking the time on Monday and the following week to look at all the proposals and see to what extent they make sense," government spokesman Thomas Steg said on Friday.

"All options are on the table and will be examined and after Monday you can expect that there will not be so many proposals on the table as there are now," he said.